Annual Report - VÚB banka

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2. Summary of significant accounting policies (continued)
Embedded derivatives
The Bank assesses whether any embedded derivatives
contained in the contract are required to
be separated from the host contract and accounted
for as derivatives under IAS 39. An embedded
derivative is a component of a hybrid (combined)
instrument that also includes a non-derivative host
contract-with the effect that some of the cash fl ows
of the combined instrument vary in a way similar to
a stand-alone derivative.
The Bank accounts for embedded derivatives separately
from the host contract, if: the economic
characteristics and risks of the embedded derivative
are not closely related to the economic
characteristics and risks of the host contract;
a separate instrument with the same terms as the
embedded derivative would meet the defi nition of
a derivative; and the hybrid (combined) instrument
is not measured at fair value with changes in fair
value recognized in profi t or loss.
Hedging derivatives
The Bank makes use of derivative instruments to
manage exposures to interest rate, foreign currency
and credit risks, including exposures arising
from forecast transactions. In order to manage particular
risks, the Bank applies hedge accounting for
transactions which meet the specifi ed criteria.
At the inception of the hedge relationship, the Bank
formally documents the relationship between the
hedged item and the hedging instrument, including
the nature of the risk, the objective and strategy for
undertaking the hedge and the method that will be
used to assess the effectiveness of the hedging relationship.
Also at the inception of the hedge relationship, a
formal assessment is undertaken to ensure the
hedging instrument is expected to be highly effective
in offsetting the designated risk in the hedged
item. Hedges are formally assessed each month. A
hedge is regarded as highly effective if the changes
in fair value or cash fl ows attributable to the
hedged risk during the period for which the hedge
is designated are expected to offset in a range of
80% to 125%. For situations where that hedged
item is a forecast transaction, the Bank assesses
whether the transaction is highly probable and presents
an exposure to variations in cash fl ows that
could ultimately affect the income statement.
Cash fl ow hedges
For designated and qualifying cash fl ow hedges,
the effective portion of the gain or loss on the
hedging instrument is initially recognized directly in
equity in the ‘Hedging reserve’. The ineffective portion
of the gain or loss on the hedging instrument is
recognized immediately in the income statement in
‘Net trading income’.
When the hedged cash fl ow affects the income statement,
the gain or loss on the hedging instrument
is ‘recycled’ in the corresponding income or expense
line of the income statement. When a hedging instrument
expires, or is sold, terminated, exercised,
or when a hedge no longer meets the criteria for
hedge accounting, any cumulative gain or loss existing
in equity at that time remains in equity and is
recognized when the hedged forecast transaction
is ultimately recognized in the income statement.
When a forecast transaction is no longer expected
to occur, the cumulative gain or loss that was reported
in equity is immediately transferred to the
income statement in ‘Net trading income’.
Annual Report 2007